Moulin Rouge: Nicole Kidman stars in the 2001 film, which was fine-tuned for a Blu-ray release.

By Mike Snider, USA TODAY

LAS VEGAS  The future of Blu-ray discs is fuzzy despite strong sales of the discs, which offer super-sharp high-definition video and crystal-clear sound. Blu-ray sales have failed to halt the overall decline in sales and rentals of home video.

Consumers spent $18.8 billion on buying and renting movie discs and digital movies in 2010, a 3.3% decrease from 2009, the Digital Entertainment Group (DEG) will report today.

"We are seeing substantial growth in Blu-ray sales, but it is such a small part of the overall physical market that it just can't overcome steep declines in DVD," says iSuppli analyst Tom Adams.

Many Blu-ray player owners are content to buy cheaper DVD discs to watch on their Blu-ray players, he says. "That's the wrinkle, from the (Hollywood) studio point of view, that they did not expect," Adams says.

Studios rely on the revenue from the higher-priced Blu-ray discs to fund ever more expensive films. If buyers increasingly opt for DVDs — or choose to pay and download or stream digital movies from video services such as Netflix— studios may be forced to make fewer films under more stringent budget decisions, says Mike Dunn, president of Fox Home Entertainment. "The studio needs creative freedom to make films as compelling and distinct as Avatar and Black Swan," he says. "We want to offer the consumer the premium experience, and that is with Blu-ray."

But some consumers opt for the cheaper video experience at home. "With the DVD sitting there for $15 and the Blu-ray for maybe $25 or even $30 ... it's easier to grab the DVD," Adams says.

That trend has Hollywood scrambling for ideas to generate new ways of making money to fund productions. "It is a very scary market," says Matthew Lieberman, director of global entertainment at PricewaterhouseCoopers.

Consumer spending on home video has slowly declined since hitting $21.8 billion in 2004. In 2010, DVD sales and rentals dropped 11% to $14 billion, while Blu-ray disc sales and rentals accounted for $2.3 billion, up 53% from 2009. Downloadable and streamed sales and rentals rose 19% to $2.5 billion. "We continued to see strong growth in Blu-ray and significant gains in digital distribution ... despite a tough economy," says Amy Smith, executive director at DEG.

Many consumers are not aware that Blu-ray discs offer up to twice the resolution of a DVD, and some deliver 3-D to compatible TVs, Lieberman says. "There needs to be better marketing."

That, coupled with shortening the time between a film's theatrical release and when it's available for home viewing, could boost home video sales.

To that end, Fox is bringing its Blu-ray promotional campaign here to the International Consumer Electronics Show with a panel of film directors including Oliver Stone, Michael Mann and Baz Luhrmann on Friday. "If consumers have been slow identifying what the (Blu-ray) difference is, directors have not," says Luhrmann, who got involved in fine-tuning the recent Blu-ray releases of his films Moulin Rouge and Romeo + Juliet. "Blu-ray allows me to realize the visual look in the way I was attempting to do in the film experience."

Dunn hopes that studios refocus on Blu-ray's future rather than worrying about the future of digitally delivered movies. "Blu-ray is the real star performer ... and is the gateway to digital and other delivery channels," he says.

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